The commission initiated legal proceedings against Youth Financial Literacy Foundation and Financial Education Services, accusing them of operating an illegal pyramid scheme and promoting deceptive credit repair services.
01/08/2024 3:20 P.M.
2.5 minute read
In a recent federal district court case, the Federal Trade Commission took decisive action against alleged deceptive practices orchestrated by the Youth Financial Literacy Foundation and Financial Education Services (FES), Inc., including Gerald Thompson, who the FTC alleges acted as the “owner, officer, director, or manager” of Youth Financial and FES.
In an amended complaint, the FTC accused the defendants of engaging in unlawful credit repair services and promoting a pyramid scheme, prompting Thompson to file a motion to dismiss the case. However, the court denied his motion based on the merits of the allegations.
Background
According to the FTC’s amended complaint (PDF), the defendants have been marketing credit repair services to U.S. consumers since at least 2015. The defendants claimed to enhance consumers’ credit scores by removing negative items from their credit reports.
The FTC contends that these credit restoration measures are deceptive, coupled with the entities charging consumers prohibited advance fees without providing necessary disclosures under federal law.
In addition to credit repair, Youth Financial and FES allegedly encouraged consumers to become sales agents, promoting their services and recruiting others, forming what the FTC considers an illegal pyramid scheme.
“Sales agent incentives run the gamut from assurances of exaggerated future commissions to discounts on credit repair products and services,” according to the action.
Claims
The FTC filed a lawsuit against Thompson, Youth Financial, FES, and other associated entities, seeking a permanent injunction and monetary relief. The amended complaint alleged that Thompson violated various statutes, including the Federal Trade Commission Act, Credit Repair Organizations Act, Telemarketing Sales Rule, Fair Credit Reporting Act, and the Gramm-Leach-Bliley Act.
Thompson filed a motion to dismiss, alleging that the FTC cannot sue him as Youth Financial’s “owner, officer, director, or manager” because the company is a nonprofit organization exempt from liability under the mentioned statutes. The court, however, rejected this argument, emphasizing that nonprofit status does not categorically exempt organizations from FTC scrutiny, citing federal precedents that consider the substance of an entity’s activities.
Decision
The FTC alleged that Youth Financial, despite its nonprofit designation, operates for its own profit or that of its members, making it subject to the statutes in question. The court rejected a categorical exemption for nonprofit organizations, endorsing a functional test that assesses an entity’s nonprofit activities.
The court further explored the applicability of the Credit Repair Organizations Act, Fair Credit Reporting Act, and the Gramm-Leach-Bliley Act, emphasizing that nonprofit status alone does not shield organizations from compliance. The analysis considered whether Youth Financial actually operates as a nonprofit, and the court found the FTC’s allegations sufficient to establish plausible non-exempt status.
Thompson’s argument that his status as an “unpaid volunteer officer” shields him from liability was also dismissed by the court. The court clarified that individual liability under the mentioned statutes does not hinge on compensation from the infringing entity.
ACA’s Take
As legal proceedings continue, this case serves as a reminder of the FTC’s commitment to safeguarding consumers from deceptive practices and pyramid schemes.
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